On March 18, Advantest offered to acquire Verigy for $15 per share. The conversion ratio for the converts were 76.263 but holders get an additional 8.5 shares under the make-whole matrix for a total of 84.763. 

Following the announcement, the VRGY 5.25% converts were trading at 124.75 vs 14.06 stock price. Upon completion (deal was completed on July 6), holders get cash equal to the new conversion ratio (84.763) times $15 for a total of 127.14.  This is a gain of 2.39 points plus 1.75 points of coupon for a total of 4.14 points. This was an annualized rate of return of 10%, which is less than about 20% for the stock but you have better protection to the downside. The converts have downside of 4% while the stock has downside of 8% compared to where the securities were trading the day before.

The key to this trade is whether you get to keep that last coupon that the converts is scheduled to pay out on July 15, 2011. This is where convert indenture analysis of the takeout make-whole language and analysis of the merger time line becomes important.

Verigy has up to 20 days to send out the Fundamental Change Company Notice, which will specify the Fundamental Change Purchase Date. The Fundamental Change Purchase date will be between 20 and 35 days after the Fundamental Change Company Notice. In total, the last day to convert will be between 20 and 55 days after the merger completion date.

Holders can convert in connection with the make whole any day after the effective date of the merger and the Fundamental Change Purchase date specified by the company (p 67, 72, 74). Page 57 says even if the fundamental change date is between the record and pay dates, you still get the coupon.

So if the merger closes 6/12/11, the fundamental change purchase date could be 7/2/11 (between record date 7/1/11 and pay date of 7/15/11), you can convert on 7/2/11 and keep the coupon.

This is an example where a faster than expected close caused convert holders to lose the last coupon.

AMMD agreed to be acquired by ENDP for $30 in cash with an expected closing date in late 3Q2011.

According to the indenture, AMMD has 0 to 20 days after the merger completion to issue a FC company notice. The FC repurchase date will then be 20 business days to 40 calendar days after the notice.

Holders can convert in connection with he make-whole between the merger effective date and the FC purchase date. (20 to 60 days). The next coupon date for AMMD 3.75% converts is 9/15/10 so the dela would have to close after 8/15/10 for holders to get the last coupon.

We belive that the FC repurchase date and FC purchase date refer to the same day and it is used differently here only due to typigraphical error.

Section 4.01 also says holders will get to keep the interest as long as the FC repurchase date is after the record date if we convert after the record date.

Expected close

We expected the close to be 10/10 close because of potential anti-trust risk. ENDP owns Revolix 11% mkt share($20-30MM in revs) and AMMD is the leader with a 65% mkt share; believe there’s a 95% prob. deal gets done & 2/3 prob. of a 2nd request; using 10/1 for timing.

There’s also a divestiture cap of 50MM in revenues but this should be enough for potential overlaps; the overlap exist in procedures for treatment of enlarged prostates(specifically lasers where the combined co. would have a 76% mkt share);

June 20, 2011

ENDP closes the acquisition of American Medical Systems much earlier than the 10/10 date that we expected. Because of the early close, the convert holders will not receive the last coupon.

In May 2010, SY agreed to be acquired by SAP for $65 cash. The deal was expected to be completed by mid July 2010. The next coupon is 8/15/10.

However, the indenture says you can hold the convert for between 20 to 30 days after the closing date before converting. In that case, if you convert after record date (8/1/10), you will get that next coupon 8/15/10

Section 3.7 says that the company has up to 20 days after the deal closes to put out a fundamental change notice. In this notice, they must announce a day for the repurchase of the bonds which is between 20-35 days later (repurchase date).

If holders convert up to the business day prior to the fundamental change repurchase date as discussed above, that will be deemed to be “in connection” with the fundamental change and entitles you to the make whole.

Section 4.2 (c) says that if the fundamental change repurchase date is in between the record and pay date (Aug 1-15), then you also get to keep the interest.

So if the deal closes on July 15 and the company gives the notice immediately, then the earliest repurchase date would be Aug 4, which is after the record date, so you would keep the accrued.

May 26, 2010

The SAP tender offer for SY will expire 7/1/10. The deal needs EU approval which takes 35 calandar days from the date of filing. SAP has not yet filed with the EU. If sap were to file on May 27, it would take at the deal to 7/1/10. Any delay would cause the deal close to get pushed back. In order to make sure we get the next coupon, the deal has to close 7/13 or after.

July 19, 2010

SAP extended the tender offer for SY to July 26

July 30, 2010

SAP closes acquisition of SY. Convert holders get the last coupon.

The following is the press release:

Sybase, Inc. Announces Closing of Merger and Entry into Supplemental Indenture Relating to its 3.50% Convertible Senior Notes Due 2029

DUBLIN, CALIF. – JULY 30, 2010 – Sybase, Inc., an industry leader in enterprise and mobile software, today announced that it is delivering notice to the holders of its 3.50% Convertible Senior Notes Due 2029 of the closing on July 29, 2010 of the “second-step” cash merger of Sheffield Acquisition Corp., a wholly owned subsidiary of SAP America, Inc., with and into Sybase at a price of $65.00 per share, with Sybase being the surviving entity.

As more fully described in the notice of the merger being delivered to noteholders, pursuant to the indenture under which the notes were issued, the notes are convertible in connection with the merger and continue to be convertible under other sections of the indenture as set forth in the Fundamental Change Notice and Non-Stock Fundamental Change Notice dated July 27, 2010(the “Fundamental Change Notice”).

Sybase also today announced that it has entered into a supplemental indenture on July 29, 2010 with U.S. Bank National Association, the trustee under the indenture with respect to the notes, providing that from and after the effective time of the merger, each $1,000 principal amount of notes will be, at the option of the noteholders, convertible into the amount of cash equal to the per share merger consideration multiplied by the conversion rate. The conversion rate for conversions submitted on or prior to the close of business on August 17, 2010 will be 22.9939, and we expect the conversion rate for conversions submitted after the close of business on August 17, 2010 to be 20.8836, each as subject to the terms of the indenture and as more fully described in the Fundamental Change Notice.

Noteholders should read carefully the notice they have received or will be receiving regarding their conversion rights resulting from the merger and their conversion rights and rights to require Sybase to repurchase their notes as set forth in the Fundamental Change Notice, as each contains important information as to the procedures and timing for the exercise of such rights, as well as information regarding the interest payable by Sybase on such notes.

Astellas agrees to acquire OSI Pharmaceuticals (OSIP) for $57.5 in a tender offer scheduled to close 6/4/2010.

The OSIP 3% converts has an interesting take out matrix because there is an incremental share factor involved.

Make whole language

Conversion rate = base conversion rate + ((57.7 – base conversion price)/57.5 times incremental share factor)

Where base conversion rate = 13.5463

Base conversion price = 73.82

Incremental share factor = 7.4505

Where the second part of the equation is 0 if the calculation is a negative number. At the current price, the conversion ratio equals 13.5463. However, in a fundamental change make whole, the base conversion rate is increased by 5.44 shares (make whole shares) to become 18.9863.

The base conversion price is now 52.67 (1000/18.9863)

The incremental share factor is now 10.43 (7.4505 *1.40)

The new conversion rate is 19.86

Parity (with takeout at $57.5) is 114.2

Conversion on make whole

Fundamental change date = 6/4/10 (estimated). The company has declare a fundamental change purchase date that is at least 30 business days after the takeout date.

Holders can convert any day between the fundamental change date and the fundamental change purchase date.

As long as we convert after the record date of 7/1/10, we will get the next coupon. We should be able to do that according to this timeline.

July 17, 2010

As previously announced he Company has made an Offer to Purchase its 3% Convertible Senior Subordinated Notes due 2038 (the “3% Notes”) pursuant to an Offer to Purchase dated June 17, 2010 as amended and supplemented (the “Offer to Purchase”). Each holder of a 3% Note has a right (the “Purchase Right”) to require the Company to purchase all or part of the holder’s 3% Notes as a result of a Fundamental Change. As explained in the Offer to Purchase, three Fundamental Changes have occurred.

One Fundamental Change occurred on June 3, 2010 as a result of the acquisition by Astellas Pharma Inc. of beneficial ownership of more than 50% of the Company’s common stock (the “Change of Control”).

A second Fundamental Change occurred on June 8, 2010 as a result of the merger of the Company with an indirect subsidiary of Astellas Pharma Inc. (the “Merger”). A third Fundamental Change occurred on June 18, 2010 as a result of the delisting of the Company’s common stock from the NASDAQ Global Select Market (the “Delisting”). The Company has amended its Offer to Purchase the 3% Notes so that the Expiration Time of the Purchase Right is July 30, 2010, regardless whether the Purchase Right arises as a result of the Change of Control, the Merger or the Delisting. For each $1,000 principal amount of 3% Notes validly tendered pursuant to the Purchase Right and not validly withdrawn on or prior to July 30, 2010, the Company will pay, in cash, the purchase price of $1,000 plus accrued and unpaid interest to, but excluding, August 2, 2010. Such payment will be made on August 2, 2010.

To exercise their Purchase Right as a result of the Change of Control, Merger or the Delisting, holders must surrender their 3% Notes for purchase to the paying agent at any time on or before July 30, 2010 and follow the applicable procedures, as described in the Indenture and in the Second Amended and Restated Fundamental Change Purchase Notice distributed to the holders of the 3% Notes and published on the Company’s web site.